Objective 3

Use the Accounting Equation

EconomicResources

Claims toEconomicResources

The Accounting Equation

Assets = Liabilities + Owner’s Equity

Accounting Equation

For a corporation, stockholders’ equity

is divided into two main categories.

Paid-in capital Retained earnings

Assets = Liabilities + Stockholders’ equity

Assets = Liabilities + Paid-in capital + Retained earnings

Accounting Equation

Paid-in capital is the amount invested

in the corporation by its owners.

The basic component of paid-in

capital is common stock.Retained earnings is the amount earned

by income-producing activities and

kept for use in the business.

Assets

What is an asset? It is something a company owns which has

future economic value.– land– building– equipment– goodwill

Liability

What is a liability?

It is something a company owes. “outsider claims” or “creditors’ claim”

Taxes Payable

Taxes Payable

Wages Payable

Wages Payable

Notes Payable

Notes Payable

Accounts Payable

Accounts Payable

Creditors’ claims on

assets

Creditors’ claims on

assets

Liabilities

Owner’s Equity

What is owner’s equity? It is what’s left of the assets after liabilities

have been deducted.– “insider claims” or “owners’ claims on the

entity’s assets

Owner’s

claims

on

assets

Owner’s

claims

on

assets

Retained earningsRetained earnings

Owner Investments/

Capital paid- in

Owner Investments/

Capital paid- in

Owner Withdrawals

Owner Withdrawals

Equity

Owner’s Equity

What are some owner’s equity accounts?– Capital or owner’s interest in the business– Withdrawals– Revenues– Expenses

Revenues

What are revenues? They are amounts received or to be received

from customers for sales of products or services.

– sales– performance of services– rent– interest

Expenses

What are expenses? They are amounts that have been paid or will

be paid later for costs that have been incurred to earn revenue.

– salaries and wages– utilities– supplies used– advertising

Quiz

Q1: Accounting equation

Assets = Liabilities + Owners’ EquityCase 1

$125,000 = $75,000 + $

Case 2

$400,000 = $ + $100,000

Case 3

$ = $320,000 + $95,000

Q2. Elements of financial statements

Classify the following items into assets (A), liabilities (L), owner’s equity (OE), revenues (R), expenses (E)

1. Cash

2. Salaries paid for staff

3. Equipment

4. Payable to Ms X

5. Amount earned from selling a product

6. Capital

7. Receivable from Mr Y

8. Building

9. Payment for advertising

began the year with retained earnings of 217. During the year,

the company issued 294 of common stock, recorded expenses of 840, and

paid dividens of 56. If ending retained earnings was 231. What ưas

the company revenue for the year?